M/S. LAXMI INDIA FINLEASECAP PVT. LTD.,KOLKATA vs. PRINCIPAL CIT - 1, KOLKATA, KOLKATA

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ITA 940/KOL/2018Status: DisposedITAT Kolkata22 January 2021AY 2013-144 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that if the assessee has sufficient own funds to cover interest-free advances, the presumption is that such advances were made from own funds, negating disallowance under Section 36(1)(iii). It also held that no disallowance under Section 14A is required if no exempt income was earned.

What were the facts?

The assessee claimed interest expenditure on unsecured loans, but the Assessing Officer disallowed a portion due to interest-free capital advances made from borrowed funds. The PCIT revised the order, finding the disallowance short and also noting no disallowance under Section 14A for exempt income.

What were the issues?

Whether disallowance of interest expenditure is justified when interest-free advances are made from a common pool of funds including own funds, and whether disallowance under Section 14A is warranted when no exempt income is earned.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 14A,Section 263

AI-generated summary — verify with the full judgment below

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Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA

Before: Shri J.Sudhakar Reddy & Shri Sanjay Garg

M/s Laxmi India Principal Commissioner of बनाम Finleasecap Pvt. Ltd., Income Tax-1, Kolkata / Kolkata V/s. PAN No. AAACL 2151 N .. अपीलाथ� /Appellant ��यथ� /Respondent Hearing through video Conferencing Shri Miraj D Shah, Advocate अपीलाथ� क� ओर से/By Appellant Mrs. Devi Sharon Singh, CIT-DR ��यथ� क� ओर से/By Respondent 11-01-2021 सुनवाई क� तार�ख/Date of Hearing 22-01-2021 घोषणा क� तार�ख/Date of Pronouncement आदेश /O R D E R PER Sanjay Garg, Judicial Member:- The present appeal has been preferred by the assessee against the order dated 22.03.2018 of the Principal Commissioner of Income Tax-1, Kolkata’s [hereinafter referred to as ‘PCIT’]. The assessee in this appeal has agitated the action of the Ld. PCIT in invoking the revision jurisdiction u/s 263 of the Income Tax Act, 1961 (in short ‘the Act’).

2.

The facts of the case are that the Assessing Officer during the assessment proceedings noted that for the year under consideration, the assessee had paid an amount of ₹5,38,35,964 as interest on unsecured loan which was claimed as interest Assessment Year 2013-14 M/s Laxmi India Finleasecap Pvt. Ltd. Vs PCIT-1 Kol. Page 2 expenditure for business purposes. However, the Assessing Officer found that the assessee during the year had made interest free capital advances of ₹2,53,82,976/- also. The Assessing Officer noticed that the aforesaid interest free advances were made out of the own funds as well as interest bearing borrowed funds. The Assessing Officer, invoking the provision of sec.36(1)(iii) of the Act, calculated the proportional notional interest in relation to the interest free advances and disallowed the same out of the interest expenditure claimed by the assessee. He for the purposes of calculation the proportionate disallowance in this respect applied the formula as under:- Interest x capital advance / Average Assets And accordingly calculated the disallowance at Rs.2099497/- However, the ld. PCIT noted that the Assessing Officer had not properly calculated the disallowance and that the same should have been calculated in the following manner:- Interest X capital advance Average long-term borrowing The Ld. PCIT accordingly calculated the disallowance at ₹24,62,692/-. He, therefore held that the order of the Assessing Officer in this respect was erroneous and prejudicial to the interest of the Revenue because of the short disallowance of ₹3,63,195/-. The Ld. PCIT further found that the assessee-company during the year had made investment in shares, the dividend income from which would have been exempt from taxation. He noted that the Assessing Officer, however, had not made any disallowance u/s 14A of the Act in respect of expenditure incurred for earning of such tax exempt income. The Ld. PCIT, therefore in exercise of his revision jurisdiction u/s 263 of the Act, set aside the order of the Assessing Officer and restore the matter to the file of the Assessing Officer with a direction to pass a fresh assessment order in the light of observation made by him.

3.

Being aggrieved by the said impugned order of the Ld. PCIT the assessee preferred before us.

Assessment Year 2013-14 M/s Laxmi India Finleasecap Pvt. Ltd. Vs PCIT-1 Kol. Page 3 4. We have heard the rival contentions and also gone through the record. Ld. counsel for the assessee has submitted that the advances were made from the common pool. That the interest free funds available with the assessee for the year under consideration in the form of capital and reserves were at ₹14.56 crores whereas the assessee had made interest free capital advance of ₹2.05 crores only, which were much below than the interest free / own funds available with the assessee. Ld. counsel for the assessee while placing reliance on the decision of the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. vs. Commissioner of Income Tax 379 ITR 347 (SC) has submitted that it has been held by the hon'ble apex court of the country that where the investments have been made from the common pool of funds and in case the assessee has sufficient own / interest free funds availing with him to meet the investment made, then in that event, presumption would be that the investment has been made out of own / interest free funds available with the assessee. That in that event no disallowance u/s 36(1)(iii) would be warranted. Ld. counsel for the assessee in this respect has also placed reliance on various case laws. We find that the issue in this respect has been settled by the Hon'ble Supreme Court in the case of CIT (LTU) vs. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) holding that if the assessee is possessed of sufficient own funds/interest free funds to meet the investments made, then under the circumstances, the presumption would be that such investments have been made by the assessee out of own/interest free funds available with the assessee. Moreover, in this case the Assessing Officer has already calculated the proportionate disallowance. Ld. PCIT while calculating the disallowance has taken into consideration the entire interest expenditure incurred as well as entire loan amount, whereas the facts of the case as noted by the Assessing Officer also is that the assessee has also used the own/ interest free funds for the purpose making interest free advances. Therefore, we do not find any justification on the part of Ld. PCIT in setting aside the order of the Assessing Officer on this issue by invoking revision jurisdiction u/s 263 of the Act. So far as issue of disallowance of expenditure u/s 14A of the Act is concerned, the issue admittedly is covered by the various decisions of the Hon'ble High Courts of the country wherein it has been held that if no exempt income has been earned by the

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